Introduction
The financial sector has long grappled with bad debts, which destabilise institutions and reduce overall economic efficiency. Recognising the urgency of addressing non-performing assets (NPAs), the Government of India introduced the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act'). This marked a transformative step in empowering creditors to recover dues efficiently, bypassing the traditional litigation-heavy processes. Over the years, the Act has undergone several amendments to expand its applicability and address emerging challenges.
Scope of the SARFAESI Act
The SARFAESI Act provides secured creditors—primarily banks and financial institutions—the right to enforce their security interests without approaching courts. This right is contingent upon issuing a notice of at least 60 days to the borrower for repayment. The Act's applicability initially excluded non-banking financial companies ("NBFCs"). However, a significant shift occurred with the notification dated August 27, 2018. It brought larger NBFCs with an asset size of INR 500 crore and above within the Act's ambit, allowing them to recover loans of INR 1 crore and above.
The scope was further broadened through a notification dated February 24, 2020, which lowered the eligibility threshold for NBFCs to those with assets of INR 100 crore and above. These entities could now recover debts where the outstanding amount was INR 20 lakh or more. Despite these expansions, disparities remain when compared to the threshold for banks, which is set at INR 1 lakh, limiting the Act's utility for smaller NBFCs.
Powers Conferred by the SARFAESI Act
One of the Act's most significant features is its conferral of extensive powers to secured creditors. If the borrower fails to discharge their liabilities within the stipulated notice period, creditors can:
- Take physical or constructive possession of the secured assets.
- Assume management of these assets and transfer them via sale, lease, or assignment to recover dues.
- Appoint a person to administer the secured assets on their behalf.
- Direct third parties holding the borrower's secured assets to remit dues directly to the creditor.
Key Challenges in Enforcement
- Threshold for triggering remedies under the SARFAESI
Act
To make the Act more inclusive for NBFCs, the central government issued Notification S.O. 856(E) dated February 24, 2020. This notification relaxed the eligibility criteria, allowing NBFCs with assets of INR 100 crore and above to recover debts of INR 20 lakh or more. Despite this reduction, the threshold remains significantly higher than the INR 1 lakh limit applicable to banks, creating a disparity that limits the Act's utility for smaller NBFCs. - Administrative roadblocks
Even with lower thresholds, NBFCs face administrative hurdles that delay recovery through the SARFAESI route. Disposing of immovable properties of defaulter borrowers often requires prolonged approval processes from revenue authorities, which deters NBFCs from effectively leveraging the SARFAESI Act.
Conclusion
The SARFAESI Act has undoubtedly enhanced debt recovery mechanisms for financial institutions. However, there is scope for further liberalising eligibility criteria to ensure broader access for NBFCs. Additionally, addressing administrative inefficiencies, such as expediting approvals for asset auctions, could significantly improve the effectiveness of the Act. If these challenges persist, secured creditors may need to rely on alternative mechanisms like approaching Debt Recovery Tribunals (DRTs) under the Recovery of Debts and Bankruptcy Act, 1993, or pursuing alternative dispute resolution methods stipulated in financing agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
